What is the official HMRC director’s loan interest rate?

HMRC’s official rate for calculating taxable “beneficial loan” interest is the Official Rate of Interest (ORI). As at the 2025/26 tax year, the ORI is 3.75% from 6 April 2025. Check the latest HMRC official rate on GOV.UK, as HMRC can now change the ORI during a tax year.

Key takeaways

In a nutshell

• The “official” rate is HMRC’s Official Rate of Interest (ORI) used to value beneficial (cheap) loans.
  
• ORI is 3.75% from 6 April 2025 (covering the 2025/26 tax year unless changed).
  
• If your director’s loan exceeds £10,000 at any point in a tax year, a Benefit in Kind (BiK) can arise if interest is not charged at (at least) the ORI.
  
• The company normally reports the BiK on P11D and pays Class 1A NIC (15% for 2025/26).
  
• You can reduce or eliminate the BiK by charging and actually paying interest at the ORI (or higher) within the tax year.
  

A quick scenario

It’s Friday afternoon. Cash is tight. You “borrow” £12,000 from your limited company to cover a personal bill, intending to put it back in a month or two.

Fast-forward: you forget about it. The balance sits overdrawn through 5 April. Suddenly you’ve got:

• a potential Benefit in Kind based on HMRC’s official interest rate, and
  
• employer reporting (P11D) and Class 1A NIC to deal with.
  

Even if your company doesn’t charge you a penny, HMRC may treat part of that cheap borrowing as taxable value — director’s loan interest is one of those areas where “it’s only temporary” can become an avoidable cost.

What is the official HMRC director’s loan interest rate?

What rate does HMRC actually use?

HMRC uses the Official Rate of Interest (ORI) to calculate the taxable value of beneficial loan arrangements — where an employee/director gets a loan at no interest or below HMRC’s official benchmark.

What is the current official rate (and from when)?

As at the 2025/26 tax year, HMRC’s published ORI is:

• 3.75% from 6 April 2025
  

Important: HMRC has stated that from 6 April 2025 the ORI may change during the tax year (it can increase, decrease, or stay the same). That’s a big shift in practice — so always check the latest HMRC official rate on GOV.UK in the “Rates and allowances: beneficial loan arrangements” guidance.

When does director’s loan interest matter?

What counts as a director’s loan?

A director’s loan is money you take out of the company that is not:

• salary through PAYE,
  
• a declared dividend,
  
• reimbursement of legitimate business expenses, or
  
• repayment of money the company already owes you.
  

On the balance sheet, this sits in the director’s loan account (DLA). If you’ve taken more out than you’ve put in, it becomes an overdrawn director’s loan account (DLA).

The £10,000 threshold: when does a BiK kick in?

The key “tripwire” is whether the loan (or total loans) is more than £10,000 at any point in the tax year.

• If it’s £10,000 or less throughout the whole tax year, there’s generally no BiK on the beneficial loan.
  
• If it exceeds £10,000 at any point, a BiK may arise for the period(s) it’s outstanding, based on the difference between interest at ORI and any interest actually paid.
  

HMRC highlights the £10,000 point for directors’ loans and links it directly to paying interest below the official rate.

When is it a benefit in kind (BiK)?

A BiK can arise when:

1. the loan exceeds the exemption threshold, and
   
2. the director/employee pays less than the ORI (including paying nothing).
   

The taxable benefit is broadly:

Interest at ORI minus interest actually paid (within the relevant period).

This is why director’s loan interest is not just a company bookkeeping issue — it can create a personal tax charge and an employer NIC cost.

Can paying interest reduce the BiK?

Yes. If the director pays interest to the company at at least the ORI (and actually pays it, not just journals it), the BiK can be reduced — potentially to nil. HMRC’s directors’ loan guidance explicitly treats discounted interest as a BiK and points you to the official rate comparison.

How do you calculate director’s loan interest?

HMRC allows more than one approach depending on the facts. In practice, you’ll usually see either:

• the averaging method (simpler), or
  
• the precise (daily) method (more accurate, especially if the balance moves around).
  

Step-by-step: the practical calculation process

1. Confirm the ORI for the relevant dates (and whether it changed mid-year). Check the latest HMRC official rate on GOV.UK.
   
2. Check the £10,000 threshold: did the loan exceed £10,000 at any point in the tax year?
   
3. Pick a method:
   
   • Averaging method (quick, often “good enough”)
     
   • Precise method (best when you have multiple advances/repayments)
     
4. Calculate interest at ORI for the relevant period(s).
   
5. Deduct any interest actually paid by the director for that tax year.
   
6. The result is the cash equivalent of the BiK to report (typically on P11D).
   

Averaging method overview 

The averaging method typically uses:

• the balance at the start and end of the tax year (or relevant period), and
  
• averages them to estimate the “typical” balance.
  

This is commonly used when the loan is broadly steady (or you don’t have lots of movements). HMRC publishes average official rates for some years to support averaging where a loan is outstanding throughout a tax year.

Basic averaging formula :

• Average loan = (opening balance + closing balance) ÷ 2
  
• Notional interest at ORI = Average loan × ORI
  
• BiK = Notional interest − interest actually paid
  

If the loan started part-way through the year, you generally time-apportion.

Precise method overview

The precise method calculates interest by reference to the actual outstanding balance over time, often on a daily basis.

Daily approach:

• Interest = balance × ORI × (days outstanding ÷ 365)
  (Using 365 is common; in leap years you may need to handle day counts carefully in your workings.)
  

This method is usually fairest when the director’s loan account fluctuates — e.g., multiple withdrawals and repayments.

Comparison table: averaging vs precise

Worked examples

Assumptions for examples: ORI 3.75% from 6 April 2025 and no in-year ORI changes. Check the latest HMRC official rate on GOV.UK for your exact dates.

Example 1: Ayesha — loan exceeds £10,000 and no interest is paid (precise method)

• 6 May 2025: Ayesha withdraws £12,000
  
• 20 December 2025: Ayesha repays £5,000
  
• 5 April 2026: Balance remains £7,000
  
• Interest paid by Ayesha: £0
  

Step 1: Break into periods

1. £12,000 from 6 May 2025 to 19 Dec 2025
   
2. £7,000 from 20 Dec 2025 to 5 Apr 2026
   

Step 2: Calculate notional interest

• Period 1: £12,000 × 3.75% × (days/365)
  
• Period 2: £7,000 × 3.75% × (days/365)
  

You (or your accountant/payroll team) would count the days in each period and apply the formula. The key point: because the balance exceeded £10,000, the BiK rules are in play, and HMRC will look for a calculation of the benefit based on director’s loan interest at ORI.

Example 2: Tom — company charges interest at ORI and it’s paid (BiK reduced to nil)

• 1 July 2025: Tom borrows £35,000
  
• Balance stays at £35,000 until 5 April 2026
  
• The company charges interest at 3.75%, and Tom pays it before 5 April 2026
  

Notional interest at ORI

• £35,000 × 3.75% = £1,312.50 for a full year
  If the loan runs for less than a full tax year, time-apportion.
  

BiK calculation

• BiK = Interest at ORI − Interest paid
  
• BiK = £1,312.50 − £1,312.50 = £0
  

So even though the loan is well above £10,000, the taxable benefit can be eliminated if the director’s loan interest is actually paid at the ORI (or higher) for the relevant period.

Example 3: Gareth — averaging method with a changing balance

• 6 April 2025: Gareth starts the year owing £9,000
  
• 1 September 2025: He withdraws another £4,000 (peak £13,000)
  
• 31 January 2026: He repays £3,000
  
• 5 April 2026: Closing balance £10,000
  
• Interest paid: £0
  

Because the balance hit £13,000, the £10,000 exemption is breached.

Averaging approach (illustrative)

• Opening balance: £9,000
  
• Closing balance: £10,000
  
• Average = (9,000 + 10,000) ÷ 2 = £9,500
  

Notional interest (full-year illustration):

• £9,500 × 3.75% = £356.25
  

In reality, because the loan crossed £10,000 during the year and the balance changed, the precise method may be more appropriate (and HMRC may expect you to use the “actual rates” approach where the facts don’t fit a simple whole-year average). The real value here is understanding what HMRC is measuring: the benefit of cheap borrowing compared with director’s loan interest at the ORI.

Tax and reporting: what happens in practice?

Benefit in Kind (BiK): who pays what?

• The director/employee pays Income Tax on the BiK value (usually through Self Assessment or coding).
  
• The company pays Class 1A National Insurance on the BiK value.
  

For 2025/26, the Class 1A NIC rate is 15%.

P11D and Class 1A: the key deadlines

If you’re reporting via P11D/P11D(b), the standard deadlines after the end of the tax year (5 April) are:

• 6 July: submit P11D forms and P11D(b)
  
• 22 July: pay Class 1A NIC (19 July if paying by cheque)
  

Company accounting treatment

If the company charges interest:

• Debit: director’s loan account (reducing the overdrawn position) or bank (if paid)
  
• Credit: interest income (profit and loss)
  

If the company does not charge interest but a BiK arises:

• You still need the BiK reporting (P11D) and Class 1A NIC.
  
• Internally, you should keep a clear calculation showing how you arrived at the BiK — transaction history matters.
  

Section 455 context (CTA 2010): the separate company tax issue

Don’t mix these up:

• Beneficial loan interest (BiK) is an employment benefits regime issue.
  
• Section 455 (CTA 2010) is a corporation tax charge on certain loans to participators (common with close companies) that are still outstanding 9 months and 1 day after the company year end.
  

It’s possible to have both a BiK issue and a Section 455 issue on the same overdrawn DLA — they’re different regimes with different triggers and reporting. HMRC’s Company Taxation Manual is the right starting point for Section 455 mechanics.

(High-level note only: the Section 455 rate is linked to dividend rates and can change. For example, dividend rate changes from April 2022 increased rates to 33.75% (upper), and published measures indicate future dividend rate changes can also affect loans to participators. Always check the current position for the dates of your loan.)

6) Practical options for directors

If you’re below £10,000

• Keep a close eye on the DLA balance around big personal payments.
  
• Remember the test is “at any point” in the tax year — a brief spike can trigger BiK rules.
  
• Maintain clean records so you can evidence the balance stayed within the exemption.
  

If you’re above £10,000 

You have a few sensible options:

1. Charge interest at (or above) the ORI
   

• Put a simple loan agreement in place (rate, repayment terms, dates).
  
• Make sure interest is actually paid (cash movement), not just journalled.
  

2. Repay before tax year end (5 April)
   

• Timing matters: repaying before 5 April can reduce the period the BiK applies.
  
• If you repay shortly after 5 April, you may still have a BiK for the prior year.
  

3. Reduce fluctuations
   

• Frequent withdrawals/repayments can make the precise method unavoidable.
  
• Consider a planned approach (e.g., monthly clearing) rather than ad-hoc spending.
  

4. Document the decision
   

• A brief board minute noting the loan terms and the intention to charge/pay interest can help keep things tidy if HMRC ever asks.
  

Decision table: charge interest vs don’t charge interest

Common mistakes

Common mistakes

• Forgetting the £10,000 “at any point” test and only checking the year-end balance.
  
• Charging interest on paper but not actually receiving payment from the director.
  
• Poor transaction history — can’t evidence dates, so calculations become guesswork.
  
• Using averaging when the balance moves significantly, creating under/overstatements.
  
• Missing P11D/P11D(b) deadlines and Class 1A payment dates.
  

Common HMRC pitfalls checklist

• DLA postings not updated in real time (director takes money; bookkeeping catches up months later)
  
• Mixed personal and business spending through the company bank account
  
• Interest calculations don’t match dates/amounts in the ledger
  
• No loan agreement/board note despite regular overdrawn balances
  
• BiK omitted because “it was repaid later” (timing still matters)
  
• Confusing BiK director’s loan interest with Section 455 (different triggers)
  

FAQ

1) What is the HMRC official rate for a director’s loan?

It’s the Official Rate of Interest (ORI) used to value beneficial (cheap) loans. As at the 2025/26 tax year, HMRC’s published ORI is 3.75% from 6 April 2025. Always check the latest HMRC official rate on GOV.UK because HMRC can now change it during a tax year.

2) When does a director’s loan become a benefit in kind?

Usually when the loan (or total loans) exceeds £10,000 at any point in the tax year and the director pays interest below the ORI (including paying no interest). The taxable benefit is broadly the difference between interest at ORI and interest actually paid for the period.

3) If I repay the loan before 5 April, do I avoid the BiK?

Potentially, yes — because the BiK is time-based. If the balance doesn’t exceed £10,000 at any time in the year, the exemption may apply. If it did exceed £10,000 earlier in the year, you may still have a BiK for the period it was above the threshold or outstanding. Keep clear dates and balances.

4) Do I have to charge interest on a director’s loan?

Legally you can decide whether the company charges interest, but tax-wise HMRC may still calculate a BiK if the loan exceeds £10,000 and interest is below the ORI. Charging and paying interest at ORI (or higher) is often the cleanest way to reduce or eliminate the benefit.

5) How is the benefit calculated for a cheap director’s loan?

Commonly either by an averaging method (using typical balances) or a precise method (using actual balances over time, often daily). The calculation values the benefit as interest at ORI minus any interest actually paid by the director for the relevant period. Use the “beneficial loan arrangements” guidance to confirm rates.

6) What forms are used to report the beneficial loan benefit?

Typically the benefit is reported on a P11D and the employer reports total Class 1A NIC due on P11D(b). Deadlines are usually 6 July after the tax year end, with Class 1A payment due by 22 July if paying electronically.

7) What is the Class 1A NIC rate on benefits for 2025/26?

For the 2025/26 tax year, the Class 1A NIC rate is 15%. This applies to taxable benefits (including a beneficial loan BiK where relevant).

8) Does the company pay tax on interest charged to the director?

Yes. If the company charges interest, it’s typically recognised as interest income in the accounts and is part of taxable profits for corporation tax purposes (subject to the company’s overall tax position). The director’s loan account should reflect the interest charged and payments received.

9) Is a director’s loan the same as Section 455 tax?

No. Director’s loan interest (BiK) is about the benefit of cheap borrowing. Section 455 (CTA 2010) is a separate corporation tax charge that can apply when certain loans to participators remain outstanding beyond the statutory timeframe after the company year end. You can have one without the other — or both.

10) Where do I find the official HMRC director’s loan interest rate?

On GOV.UK under “Rates and allowances: beneficial loan arrangements — HMRC official rates”. That page lists actual official rates with start dates (for example, 3.75% from 6 April 2025) and the average official rates used in some averaging calculations.

Summary

HMRC’s benchmark for valuing cheap loans is the Official Rate of Interest (ORI) — and as at 6 April 2025, that rate is 3.75%. If your overdrawn DLA goes over £10,000 at any point and you don’t pay interest at least at the ORI, you’re into BiK territory with P11D reporting and Class 1A NIC.

Next steps:

• Pull a DLA transaction report and confirm the maximum balance in the tax year.
  
• Check the ORI on GOV.UK for the exact dates your loan was outstanding.
  
• Decide whether to charge/pay interest or repay before year end, and document it simply.